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Accounting Research September 1939
BULLETINS
No. 3
Issued by the Committee on Accounting Procedure, American Institute of Accountants, 13 East 41st Street, New York, N. Y.
Copyright 1939 by American Institute of Accountants
Quasi-Reorganization or Corporate Readjustment—Amplification of Institute Rule No. 2 of 1934
THE following rule was adopted by the Institute in 1934:
"Capital surplus, however created, should not be used to relieve the income account of the current or future years of charges which would otherwise fail to be made thereagainst. This rule might be subject to the exception that where, upon reorganization, a re-organized company would be relieved of charges which would re-quire to be made against income if the existing corporation were continued, it might be regarded as permissible to accomplish the same result without reorganization provided the facts were as fully revealed to, and the action as formally approved by, the share-holders as in reorganization."
In view of the fact that the Institute was the first to put forward in any formal manner the proposition contained in the second sentence of the rule, it has, perhaps, a special responsibility in the premises. Certain problems have arisen since 1934 regarding the application of this proposition which warrant amplification of this part of the rule.
Readjustments of the kind mentioned in the second part of the rule fall in the category of what are sometimes called quasi-reorganiza-tions. This statement does not aim to deal with the general question of quasi-reorganizations but only with cases in which the exception permitted under the rule of 1934 is availed of by a corporation. Hereinafter such cases will be referred to as "readjustments," and the problems fall under two questions, (a) what may be permitted in a readjustment, and (b) what may be permitted thereafter.
Procedure in Readjustment
If a corporation elects to bring about a legitimate restatement of its assets, stock, and surplus through readjustment and thus avail itself of the permission to relieve its future income account or earned-surplus account of charges which should otherwise be made thereagainst, it should make a clear report to the stockholders of the restatements proposed to be made, and obtain their formal consent. It should present a fair and conservative balance-sheet as at the date of the
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